Texas Insurance Code - Not Codified - Article 1.15A. Independent Audit Of Financial Statement
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Texas Laws > Insurance Code - Not Codified > Texas Insurance Code - Not Codified - Article 1.15A. Independent Audit Of Financial Statement
Article: 1.04D 1.09-1 1.10 1.12 1.13 1.14-3 1.15 1.15A 1.15B 1.16 1.17 1.17A 1.18 1.19 1.32
Art. 1.15A. INDEPENDENT AUDIT OF FINANCIAL STATEMENT.
Article repealed effective April 1, 2007
Sec. 1. The purpose of this article is to require an annual
examination by an independent certified public accountant of the
financial statements reporting the financial condition and the
results of operations of each insurer.
Sec. 2. This article applies to each insurer except an
insurer exempt under Section 4, 6, or 7 of this article.
Sec. 3. In this article:
(1) "Accountant" means an independent certified public
accountant or accounting firm that meets the requirements of
Section 12 of this article.
(2) "Affiliate" has the meaning assigned by Subsection (a)
of Section 2 of Article 21.49-1 of this code.
(3) "Board" means the State Board of Insurance.
(4) "Commissioner" means the commissioner of insurance.
(5) "Insurer" means an insurer authorized to do business
under the law of this state and includes life, health, and accident
insurance companies, fire and marine companies, general casualty
companies, title insurance companies, fraternal benefit societies,
mutual life insurance companies, local mutual aid associations,
statewide mutual assessment companies, mutual insurance companies
other than life, farm mutual insurance companies, county mutual
insurance companies, Lloyd's plans, reciprocal and interinsurance
exchanges, group hospital service corporations, health maintenance
organizations, stipulated premium insurance companies, and
nonprofit legal services corporations.
(6) "Subsidiary" has the meaning assigned by Section 2 of
Article 21.49-1 of this code.
Sec. 4. (a) Except as provided by Subsections (b) and (c) of
this section, an insurer otherwise subject to this article that has
less than $1 million in direct premiums written in this state during
a calendar year, in lieu of the annual examination required by this
article for that calendar year, may submit an affidavit under oath
of an officer of the insurer that specifies the amount of direct
premiums written in this state, and such insurer shall be exempt
from the audit required by this article.
(b) The commissioner may require an insurer that is exempt
under Subsection (a) of this section to comply with this article if
the commissioner finds that the insurer's compliance is necessary
for the commissioner to fulfill the commissioner's statutory
responsibilities; provided that this subsection shall not apply to
any fraternal benefit society qualifying for exemption under
Subsection (a) of this section which has no direct premiums written
in this state for accident and health insurance during a calendar
(c) An insurer that has assumed premiums of $1 million or
more under reinsurance agreements is not exempt under Subsection
(a) of this section.
Sec. 5. Deleted by Acts 1991, 72nd Leg., ch. 242, Sec. 11.02,
eff. Sept. 1, 1991.
Exemption for Insurers Filing Audits in Another State
Sec. 6. (a) A foreign or alien insurer that files an audited
financial report in another state, pursuant to that state's
requirement for audited financial reports, may be exempt from
filing a report under this article if the commissioner finds that
the other state's requirements are substantially similar to the
requirements in this article.
(b) A copy of the audited financial report, the report on
significant deficiencies in internal controls, and the
accountant's letter of qualifications filed with the other state
must be filed with the commissioner in accordance with the filing
dates provided by Sections 9 and 16 of this article.
(c) A copy of a notification of adverse financial conditions
report filed with the other state by a person exempt under this
section must be filed with the commissioner within the time
provided by Section 15 of this article.
Financial Hardship Exemption
Sec. 7. (a) An insurer otherwise subject to this article and
not eligible for an exemption under Section 4 or 6 of this article
may apply to the commissioner for a financial hardship exemption.
(b) Except as provided by Subsection (c) of this section,
the commissioner may grant an exemption under this section if the
commissioner finds, after review of the application, that
compliance with this rule would constitute a severe financial or
organizational hardship on the insurer. An exemption may be
granted at any time and from time to time for a specified period or
(c) The commissioner may not grant an exemption under this
section if the exemption diminishes the department's ability to
monitor the financial condition of the insurer and may not grant an
exemption to an insurer that:
(1) has been placed under supervision, conservatorship, or
receivership during the five-year period immediately preceding the
date on which application for the exemption is made;
(2) has undergone a change in control, as defined by Section
2, Article 21.49-1 of this code during the five-year period
immediately preceding the date on which application for the
exemption is made;
(3) has been identified by the department as a troubled
(4) has been subject to a significant number of complaints,
as determined by the commissioner, during the five-year period
immediately preceding the date on which application for the
exemption is made;
(5) has been or is the subject of a disciplinary action by
the board; or
(6) is not in compliance with any law or any rule adopted by
the board or commissioner.
(d) An insurer that is aggrieved by a determination of the
commissioner under this section may appeal that determination under
Article 1.04 of this code.
Sec. 8. This article does not prohibit, preclude, or limit
the board from ordering, conducting, or performing an examination
of any insurer under this code or the board's rules.
Filing and Extensions for Filing of Annual Audited Financial
Sec. 9. (a) Each insurer shall have an annual audit by an
accountant and shall file an audited financial report for the
preceding calendar year with the commissioner on or before June 30
of each year.
(b) Extension of the filing date for the audited financial
report may be granted by the commissioner for 30-day periods on a
showing by the insurer and its accountant of reasons for requesting
the extension and determination by the commissioner of good cause
for an extension. The request for extension must be submitted in
writing before the 10th day preceding the date the report is due to
be filed and must include sufficient detail to permit the
commissioner to make an informed decision with respect to the
(c) The commissioner may require an insurer to file the
audited financial report on a date before June 30 of a particular
year if the commissioner notifies the insurer of the date not later
than the 90th day before the date on which the report is to be filed.
(d) If the insurer fails to comply with this article, the
commissioner shall order the audit performed by an independent
qualified certified public accountant and assess against the
insurer the cost of auditing the insurer's financial statement
under this article, and the insurer shall pay the amount of the
assessment to the commissioner not later than the 30th day after the
date the commissioner issues the notice of assessment to the
insurer. Money collected under this section shall be deposited in
the state treasury to the credit of the State Board of Insurance
operating fund for the use of the board and the department for the
purpose of paying the expenses incurred under the article.
Contents of Audited Financial Report
Sec. 10. (a) The audited financial report shall report the
financial condition of the insurer as of the end of the most recent
calendar year and the results of the insurer's operations, changes
in financial position, and changes in capital and surplus for that
year in conformity with statutory accounting practices prescribed
or otherwise permitted by the insurance regulator in the state of
(b) The audited financial report must include the
(1) the report of an accountant;
(2) a balance sheet that reports admitted assets,
liabilities, capital, and surplus;
(3) a statement of gain or loss from operations;
(4) a statement of cash flows;
(5) a statement of changes in capital and surplus;
(6) any notes to financial statements; and
(7) supplementary data and information including any
additional data or information required by the commissioner.
(c) The notes to the financial statements required by
Subdivision (6) of Subsection (b) of this section must include:
(1) a reconciliation of differences, if any, between the
audited statutory financial statements and the annual statements
filed pursuant to this code with a written description of the nature
of these differences;
(2) any notes required by the appropriate National
Association of Insurance Commissioners annual statement
instructions or by generally accepted accounting principles; and
(3) a summary of the ownership of the insurer and the
relationship of the insurer to any affiliated company.
(d) The financial statements included in the audited
financial report must be prepared in a form and using language and
groupings substantially the same as the relevant sections of the
insurer's annual statement filed with the commissioner. Except in
the first year in which an insurer is required to file an audited
financial report, the financial statements also must be
comparative, presenting the amounts as of December 31 of the
reported year and the amounts as of December 31 of the preceding
(e) Insurers required to be examined under Section 2 of this
article who did not retain an independent certified public
accountant to perform an annual examination for the previous year
shall not be required to include the following reports covered by
the accountant's opinion for the first year, although such
statements shall be presented and labeled unaudited:
(1) Statement of operations.
(2) Statement of cash flows.
(3) Statements of changes in capital and surplus.
All other reports described in Section 9 must be included.
For the succeeding year and each year thereafter, such insurers
shall file with the commissioner all reports required by this
(f) The audited financial report must also include
information required by the department to conduct the examination
of the insurer under Article 1.15 of this code. The commissioner
shall adopt rules governing the information to be included in the
report under this subsection.
Canadian or British Insurers
Sec. 10A. (a) In lieu of the audited financial report
required under Section 9 of this article, an insurer domiciled in
Canada or the United Kingdom may file its annual statement of total
business on the form filed by the company with the appropriate
regulatory authority in the country of domicile. The statement
must be audited by an independent accountant chartered in the
country of domicile.
(b) The chartered accountant shall register with the
commissioner under Section 11(a) of this article, and the
registration must be accompanied by a statement, signed by the
accountant, indicating that the accountant is aware of the
requirements of this article and affirming that the accountant will
express the accountant's opinion in conformity with those
Designation of Accountant
Sec. 11. (a) Each insurer must register with the commissioner
the name and address of the accountant retained to prepare an
audited financial report required by this article. The
registration must be made in writing not later than December 31 of
the calendar year to be covered by the audited financial report.
(b) The registration must be accompanied by a statement
signed by the accountant indicating that the accountant is aware of
the requirements of this article, and of the rules and regulations
of the insurance department of the insurer's state of domicile that
relate to accounting and financial matters and affirming that the
accountant will express the accountant's opinion on the financial
statements in terms of their conformity to the statutory accounting
practices prescribed or otherwise permitted by that department,
specifying any exceptions the accountant believes are appropriate.
(c) The commissioner may not accept an audited financial
report from an insurer that is prepared by an accountant that is not
registered under this section.
(d) The commissioner may not accept registration under this
section for a person who does not comply with Section 12 of this
article and with the other requirements of this article.
Qualifications of Accountant
Sec. 12. (a) Except as provided by Subsections (b) and (c) of
this section, the commissioner shall accept an audited financial
report from an accountant who is an independent certified public
accountant in good standing with the American Institute of
Certified Public Accountants and in all states in which the
accountant or firm is licensed to practice and who conforms to the
Code of Professional Ethics of the American Institute of Certified
Public Accountants and to the rules and regulations and Code of
Ethics and Rules of Professional Conduct of the Texas State Board of
Public Accountancy or a similar code. In the case of an insurer
domiciled in Canada, the commissioner shall accept an audited
financial report from an accountant chartered in Canada, and, in
the case of an insurer domiciled in Great Britain, the commissioner
shall accept an audited financial report from an accountant
chartered in Great Britain.
(b) A partner or other person responsible for rendering a
report for an insurer for seven consecutive years may not render a
report for that insurer, or any of the subsidiaries or affiliates of
the insurer that are engaged in the business of insurance, during
the two years following the seventh year. The commissioner may
determine that the limitation in this subsection does not apply to
the accountant for a particular insurer if the insurer
demonstrates, to the satisfaction of the commissioner, that its
application to the insurer would be unfair because of unusual
circumstances. In making the determination, the commissioner may
(1) the number of partners or individuals employed by the
accountant, the expertise of the partners or individuals employed
by the accountant, or the number of insurance clients of the
(2) the premium volume of the insurer; and
(3) the number of jurisdictions in which the insurer
(c) The commissioner may not accept an audited financial
report prepared in whole or in part by an individual or firm who the
(1) has been convicted of fraud, bribery, a violation of the
Racketeer Influenced and Corrupt Organizations Act (18 U.S.C.
Sections 1961 through 1968), or any state or federal criminal
offense involving dishonest conduct;
(2) has violated the insurance laws of this state with
respect to any report filed under this article;
(3) has demonstrated a pattern or practice of failing to
detect or disclose material information in reports filed under this
(4) has directly or indirectly entered into an agreement of
indemnity or release of liability regarding an audit of an insurer.
(d) The commissioner may hold a hearing to determine if an
accountant is qualified and independent and, considering the
evidence presented, may rule that the accountant is not qualified
and independent for purposes of expressing an opinion on the
financial statements in the audited financial report filed under
(e) If the commissioner rules that an accountant is not
qualified and independent, the commissioner shall issue an order
directing the insurer to replace the accountant with a qualified
and independent accountant.
Resignation or Dismissal of Accountant
Sec. 12A. (a) If the accountant who signed an audited
financial report resigns as accountant for the insurer or is
dismissed by the insurer after the report is filed, the insurer
shall notify the department not later than the fifth business day
after the date of resignation or dismissal.
(b) Not later than the 10th business day after the insurer
gives the notification required by Subsection (a) of this section,
the insurer shall file a written statement with the commissioner
advising the commissioner of any disagreements between the
accountant and personnel of the insurer responsible for
presentation of its financial statements relating to accounting
principles or practices, financial statement disclosure, or
auditing scope or procedures that occurred during the 24-month
period immediately preceding the date of resignation or dismissal
and that, if not resolved to the satisfaction of the accountant,
would have caused the accountant to note the disagreement in
connection with the audited financial report. The statement must
include both disagreements that were resolved to the accountant's
satisfaction and those that were not resolved to the accountant's
(c) The insurer shall file with the statement required under
Subsection (b) of this section a letter signed by the accountant
stating whether the accountant agrees with the insurer's statement
and, if not, stating the reasons why the accountant does not agree.
If the accountant is unwilling or unable to provide the letter, the
insurer shall file with the commissioner a copy of a written request
to the accountant for the letter.
Consolidated or Combined Audits
Sec. 13. (a) An insurer may make written application to the
commissioner for approval to file audited combined or consolidated
financial statements instead of separate annual audited financial
reports if the insurer is part of a group of insurance companies
that uses a pooling or 100 percent reinsurance agreement that
affects the solvency and integrity of the insurer's reserves and
the insurer cedes all of its direct and assumed business to the
pool. The application for approval must be filed on or before
December 31 of the calendar year for which the combined or
consolidated audited financial statements are to be filed.
(b) An insurer that receives approval from the commissioner
under Subsection (a) of this section shall file a columnar
consolidating or combining worksheet for consolidated or combined
financial statements that must include the following:
(1) amounts shown on the consolidated or combined audited
(2) amounts for each insurer stated separately;
(3) noninsurance operations shown on a combined or
(4) explanations of consolidating and eliminating entries;
(5) reconciliation of any differences between the amounts
shown in the individual insurer columns of the worksheet and
comparable amounts shown on the insurers' annual statements.
(c) An insurer who does not receive approval from the
commissioner to file an audited combined or consolidated financial
statements for the insurer and any of its subsidiaries or
affiliates shall file a separate audited financial report.
Scope of Accountant's Examination and Report
Sec. 14. (a) The financial reports furnished under Section 8
of this article must be examined by an accountant.
(b) The examination of an insurer's financial reports shall
be conducted in accordance with generally accepted auditing
standards or with standards adopted by the Public Company
Accounting Oversight Board, as applicable. The accountant
conducting the audit shall consider:
(1) the standards specified in the Examiner's Handbook
promulgated by the National Association of Insurance
(2) other analogous nationally recognized standards adopted
by commissioner rule.
Notification of Adverse Financial Condition
Sec. 15. (a) An insurer required to furnish an audited
financial report shall require the accountant to immediately notify
in writing the board of directors of the insurer or its audit
committee of a determination by that accountant that:
(1) the insurer has materially misstated its financial
condition as reported to the commissioner as of the balance sheet
date currently under examination; or
(2) the insurer does not meet the minimum capital and
surplus requirements provided by this code for that insurer as of
(b) The insurer shall furnish to the commissioner a copy of
the accountant's written notice not later than the fifth business
day after the date on which the insurer receives the notice from the
accountant and shall provide the accountant with evidence that the
notice has been furnished to the commissioner. If the accountant
does not receive the evidence on or before the fifth business day
after the date on which the accountant notified the insurer, the
accountant shall, not later than the 10th business day after the
date on which the accountant notified the insurer, file a copy of
the written notice with the commissioner.
(c) If the accountant, subsequent to the date of the audited
financial report filed under this article, becomes aware of facts
that might have affected the report, the accountant must take
action as prescribed in Volume 1, Section AU 561, Professional
Standards of the American Institute of Certified Public
(d) An accountant is not liable to the insurer, its
policyholders, shareholders, officers, employees or directors,
creditors or affiliates, for any statement made under Subsections
(a) and (b) of this section if the statement was made in good faith
to comply with those subsections.
Report on Significant Deficiencies in Internal Control
Sec. 16. (a) In addition to the audited financial report,
each insurer shall furnish to the commissioner the written report
of significant deficiencies required and prepared in accordance
with the Professional Standards of the American Institute of
Certified Public Accountants.
(b) The report required by this section must be filed
annually by the insurer with the commissioner not later than the
60th day after the date the audited financial report is filed. The
insurer is also required to provide a description of remedial
actions taken or proposed to correct significant deficiencies, if
the actions are not described in the accountant's report.
(c) The report must follow generally the form for
communication of internal control structure matters noted in an
audit described in SAS No. 60, Section AU 325, Professional
Standards of the American Institute of Certified Public
Accountant's Letter of Qualifications
Sec. 16A. (a) The audited financial report must be
accompanied by a letter furnished by the accountant stating:
(1) that the accountant is independent with respect to the
insurer and conforms to the standards of the profession contained
in the Code of Professional Ethics, the statements of the American
Institute of Certified Public Accountants, and the Rules of
Professional Conduct of the Texas Board of Public Accountancy, or a
(2) the background and experience of the accountant in
general, the experience in audits of insurers of each individual
assigned to prepare the audit, and whether the individual is an
independent certified public accountant;
(3) that the accountant understands that the annual audited
financial report and the accountant's opinion on the report will be
filed in compliance with this article and that the commissioner
will rely on the report and opinion in the monitoring and regulation
of the financial position of insurers;
(4) that the accountant consents to the requirements of
Section 17 of this article and that the accountant agrees to make
the accountant's work papers available for review by the
commissioner or the commissioner's designee;
(5) that the accountant is properly licensed by an
appropriate state licensing authority and is a member in good
standing in the American Institute of Certified Public Accountants;
(6) that the accountant is in compliance with the
requirements of Section 12 of this article.
(b) Subsection (a)(2) of this section does not prohibit an
accountant from using any staff the accountant considers
appropriate if use of that staff is consistent with the generally
accepted auditing standards.
Definition, Availability, and Maintenance of Accountant Work
Sec. 17. (a) Work papers are the records kept by the
accountant of the procedures followed, the tests performed, the
information obtained, and the conclusions reached pertinent to the
accountant's examination of the financial statements of an insurer
and may include work programs, analyses, memoranda, letters of
confirmation and representation, abstracts of company documents
and schedules, or commentaries prepared or obtained by the
accountant in the course of the accountant's examination of the
financial statements of an insurer that support the accountant's
(b) Each insurer required to file an audited financial
report shall require the accountant to make available for review by
the department's examiners the work papers and any record of
communications related to the audit between the accountant and the
insurer prepared in the conduct of the examination. The insurer
shall require that the accountant retain the audit work papers and
records of communications until the department has filed a report
on examination covering the period of the audit, but not longer than
seven years after the period reported.
(c) In the conduct of the periodic review by the
department's examiners, photocopies of pertinent audit work papers
may be made and retained by the board. Reviews by the department's
examiners are considered investigations, and all work papers
obtained during the course of those investigations may be made
confidential by the commissioner, unless admitted as evidence in a
hearing before a governmental agency or in a court of competent
Sec. 18. Deleted by Acts 1991, 72nd Leg., ch. 242, Sec. 11.02,
eff. Sept. 1, 1991.
Added by Acts 1989, 71st Leg., ch. 1082, Sec. 2.01, eff. Sept. 1,
1989. Amended by Acts 1991, 72nd Leg., ch. 242, Sec. 11.02, eff.
Sept. 1, 1991; Sec. 10(f) amended by Acts 1993, 73rd Leg., ch. 685,
Sec. 7.06, eff. Sept. 1, 1993; Sec. 12(c) amended by Acts 2005,
79th Leg., ch. 408, Sec. 1, eff. Sept. 1, 2005; Sec. 14(b) amended
by Acts 2005, 79th Leg., ch. 408, Sec. 2, eff. Sept. 1, 2005.
Last modified: August 11, 2007